consolidated handicapped and disabled ......the honorable don knabe -2- june 13, 2014 if you have...

LOS ANGELES COUNTY

Revised Audit Report

CONSOLIDATED HANDICAPPED AND

DISABLED STUDENTS (HDS), HDS II,

SERIOUSLY EMOTIONALLY

DISTURBED PUPILS (SEDP) PROGRAM

Chapter 1747, Statutes of 1984;



and Chapter 654, Statutes of 1996

July 1, 2006, through June 30, 2010

JOHN CHIANG California State Controller

June 2014

JOHN CHIANG

California State Controller

June 13, 2014

The Honorable Don Knabe, Chairman

Los Angeles County Board of Supervisors

500 West Temple Street, Room 822

Kenneth Hahn Hall of Administration

Los Angeles, CA 90012

Dear Mr. Knabe:

The State Controller’s Office audited the costs claimed by Los Angeles County for the

legislatively mandated Consolidated Handicapped and Disabled Students (HDS), HDS II,

Seriously Emotionally Disturbed Pupils (SEDP) Program (Chapter 1747, Statutes of 1984;

Chapter 1274, Statutes of 1985; Chapter 1128, Statutes of 1994; and Chapter 654, Statutes of

1996) for the period of July 1, 2006, through June 30, 2010.

This revised final report supersedes our previous report dated March 28, 2014. Subsequent to the

issuance of our final report, the California Department of Mental Health finalized its Early and

Periodic Screening, Diagnosis and Treatment (EPSDT) reimbursements for fiscal year (FY)

2009-10. We recalculated EPSDT revenues for FY 2009-10 and revised Finding 5 to reflect the

actual funding percentages based on the final settlement. The revision increased allowable costs

by $195,812, from $54,031,000 to $54,226,812.

The county claimed $77,247,725 for the mandated program. Our audit found that $54,226,812 is

allowable ($54,246,812 less a $20,000 penalty for filing late claims) and $23,020,913 is

unallowable. The costs are unallowable primarily because the county overstated mental health

services costs by including ineligible and unsupported costs; overstated residential placement

costs by including ineligible for-profit vendors and unsupported costs; overstated indirect costs

by applying rates to ineligible and unsupported costs; and overstated offsetting reimbursements

by applying revenues to ineligible and unsupported costs. The State paid the county $14,622,716.

Allowable costs claimed exceed the amount paid by $39,604,096.

If you disagree with the audit findings, you may file an Incorrect Reduction Claim (IRC) with

the Commission on State Mandates (CSM). The IRC must be filed within three years following

the date that we notify you of a claim reduction. You may obtain IRC information at the CSM’s

website at www.csm.ca.gov/docs/IRCForm.pdf.

http://www.csm.ca.gov/docs/IRCForm.pdf

The Honorable Don Knabe -2- June 13, 2014

If you have any questions, please contact Jim L. Spano, Chief, Mandated Cost Audits Bureau, by

phone at (916) 323-5849.

Sincerely,

Original signed by

JEFFREY V. BROWNFIELD, CPA

Chief, Division of Audits

JVB/sk

cc: John Naimo, Acting Auditor-Controller

Los Angeles County

Marvin Southard, Director

Department of Mental Health

Los Angeles County

Ed Jewik, Program Specialist V

Los Angeles County

Michael Byrne, Principal Program Budget Analyst

Mandates Unit, Department of Finance

Carol Bingham, Senior Fiscal Policy Advisor

Government Affairs Division

California Department of Education

Erika Cristo

Special Education Program

California Department of Mental Health

Chris Essman, Manager

Special Education Division

California Department of Education

Jay Lal, Manager Division of Accounting and Reporting

State Controller’s Office

Los Angeles County Consolidated HDS, HDS II, and SEDP Program

Contents


Summary ............................................................................................................................ 1

Background ........................................................................................................................ 1

Objective, Scope, and Methodology ................................................................................. 3

Conclusion .......................................................................................................................... 3

Views of Responsible Official ........................................................................................... 4

Restricted Use .................................................................................................................... 4

Revised Schedule 1—Summary of Program Costs ............................................................. 5

Revised Findings and Recommendations ............................................................................. 7

Attachment—County’s Response to Draft Audit Report


-1-


The State Controller’s Office (SCO) audited the costs claimed by Los

Angeles County for the legislatively mandated Consolidated

Handicapped And Disabled Students (HDS), HDS II, Seriously

Emotionally Disturbed Pupils (SEDP) Program (Chapter 1747, Statutes

of 1984; Chapter 1274, Statutes of 1985; Chapter 1128, Statutes of 1994;

and Chapter 654, Statutes of 1996) for the period of July 1, 2006,

through June 30, 2010.

The county claimed $77,247,725 for the mandated program. Our audit

found that $54,226,812 is allowable ($54,246,812 less a $20,000 penalty

for filing late claims) and $23,020,913 is unallowable. The costs are

unallowable primarily because the county overstated mental health

services costs by including ineligible and unsupported costs; overstated

residential placement costs by including ineligible for-profit vendors and

unsupported costs; overstated indirect costs by applying rates to

ineligible and unsupported costs; and overstated offsetting

reimbursements by applying revenues to ineligible and unsupported

costs. The State paid the county $14,622,716. Allowable costs claimed

exceed the amount paid by $39,604,096.

Handicapped and Disabled Students (HDS) Program

Chapter 26 of the Government Code, commencing with section 7570,

and Welfare and Institutions Code section 5651 (added and amended by

Chapter 1747, Statutes of 1984, and Chapter 1274, Statutes of 1985)

require counties to participate in the mental health assessment for

“individuals with exceptional needs,” participate in the expanded

“Individualized Education Program” (IEP) team, and provide case

management services for “individuals with exceptional needs” who are

designated as “seriously emotionally disturbed.” These requirements

impose a new program or higher level of service on counties.

On April 26, 1990, the Commission on State Mandates (CSM) adopted

the statement of decision for the HDS Program and determined that this

legislation imposed a State mandate reimbursable under Government

Code section 17561. The CSM adopted the parameters and guidelines for

the HDS Program on August 22, 1991, and last amended them on

January 25, 2007.

The parameters and guidelines for the HDS Program state that only 10%

of mental health treatment costs are reimbursable. However, on

September 30, 2002, Assembly Bill 2781 (Chapter 1167, Statutes of

2002) changed the regulatory criteria by stating that the percentage of

treatment costs claimed by counties for fiscal year (FY) 2000-01 and

prior fiscal years is not subject to dispute by the SCO. Furthermore, this

legislation states that, for claims filed in FY 2001-02 and thereafter,

counties are not required to provide any share of these costs or to fund

the cost of any part of these services with money received from the Local

Revenue Fund established by Welfare and Institutions Code section

17600 et seq. (realignment funds).

Summary

Background


-2-

Furthermore, Senate Bill 1895 (Chapter 493, Statutes of 2004) states that

realignment funds used by counties for the HDS Program “are eligible

for reimbursement from the state for all allowable costs to fund

assessments, psychotherapy, and other mental health services . . .” and

that the finding by the Legislature is “declaratory of existing law”

(emphasis added).

The CSM amended the parameters and guidelines for the HDS Program

on January 26, 2006, and corrected them on July 21, 2006, allowing

reimbursement for out-of-home residential placements beginning July 1,

2004.

Handicapped and Disabled Students (HDS II) Program

On May 26, 2005, the CSM adopted a statement of decision for the HDS

II Program that incorporates the above legislation and further identified

medication support as a reimbursable cost, effective July 1, 2001. The

CSM adopted the parameters and guidelines for this new program on

December 9, 2005, and last amended them on October 26, 2006.

The parameters and guidelines for the HDS II Program state that “Some

costs disallowed by the State Controller’s Office in prior years are now

reimbursable beginning July 1, 2001 (e.g., medication monitoring).

Rather than claimants re-filing claims for those costs incurred beginning

July 1, 2001, the State Controller’s Office will reissue the audit reports.”

Consequently, we are allowing medication support costs commencing on

July 1, 2001.

Seriously Emotionally Disturbed Pupils (SEDP) Program

Government Code section 7576 (added and amended by Chapter 654,

Statutes of 1996) requires new fiscal and programmatic responsibilities

for counties to provide mental health services to seriously emotionally

disturbed pupils placed in out-of-state residential programs. Counties’

fiscal and programmatic responsibilities include those set forth in Title 2,

California Code of Regulations, section 60100, which provides that

residential placements may be made out of state only when no in-state

facility can meet the pupil’s needs.

On May 25, 2000, the CSM adopted the statement of decision for the

Seriously Emotionally Disturbed Pupils: Out-of-State Mental Health

Services (SEDP) Program and determined that Chapter 654, Statutes of

1996, imposed a state mandate reimbursable under Government Code

section 17561. The CSM adopted the parameters and guidelines for the

SEDP Program on October 26, 2000. The CSM determined that the

following activities are reimbursable:

Payment for out-of-state residential placements;

Case management of out-of-state residential placements. Case

management includes supervision of mental health treatment and

monitoring of psychotropic medications;

Travel to conduct quarterly face-to-face contacts at the residential

facility to monitor level of care, supervision, and the provision of


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mental health services as required in the pupil’s IEP; and

Program management, which includes parent notifications as

required; payment facilitation; and all other activities necessary to

ensure that a county’s out-of-state residential placement program

meets the requirements of Government Code section 7576.

The CSM consolidated the parameters and guidelines for the HDS, HDS

II, and SEDP Programs for costs incurred commencing with FY 2006-07

on October 26, 2006, and last amended them on September 28, 2012. On

September 28, 2012, the CSM stated that Chapter 43, Statutes of 2011,

“eliminated the mandated programs for counties and transferred

responsibility to school districts, effective July 1, 2011. Thus, beginning

July 1, 2011, these programs no longer constitute reimbursable state-

mandated programs for counties.” The consolidated program replaced

the prior HDS, HDS II, and SEDP mandated programs. The parameters

and guidelines establish the state mandate and define reimbursable

criteria. In compliance with Government Code section 17558, the SCO

issues claiming instructions to assist local agencies and school districts in

claiming mandated program reimbursable costs.

We conducted the audit to determine whether costs claimed represent

increased costs resulting from the Consolidated HDS, HDS II, and SEDP

Program for the period of July 1, 2006, through June 30, 2010.

Our audit scope included, but was not limited to, determining whether

costs claimed were supported by appropriate source documents, were not

funded by another source, and were not unreasonable and/or excessive.

We conducted this performance audit under the authority of Government

Code sections 12410, 17558.5, and 17561. We did not audit the county’s

financial statements. We conducted the audit in accordance with

generally accepted government auditing standards. Those standards

require that we plan and perform the audit to obtain sufficient,

appropriate evidence to provide a reasonable basis for our findings and

conclusions based on our audit objectives. We believe that the evidence

obtained provides a reasonable basis for our findings and conclusions

based on our audit objectives.

We limited our review of the county’s internal controls to gaining an

understanding of the transaction flow and claim preparation process as

necessary to develop appropriate auditing procedures.

Our audit found instances of noncompliance with the requirements

outlined above. These instances are described in the accompanying

Summary of Program Costs (Schedule 1) and in the Findings and

Recommendations section of this report.

For the audit period, Los Angeles County claimed $77,247,725 for costs

of the Consolidated HDS, HDS II, and SEDP Program. Our audit found

that $54,226,812 is allowable ($54,246,812 less a $20,000 penalty for

filing late claims) and $23,020,913 is unallowable.

Objective, Scope,

and Methodology

Conclusion


-4-

For the fiscal year (FY) 2006-07 claim, the State paid the county

$13,763,796. Our audit found that $3,724,001 is allowable. The State

will offset $10,039,795 from other mandated program payments due the

county. Alternatively, the county may remit this amount to the State.

For the FY 2007-08 claim, the State paid the county $858,920. Our audit

found that $7,414,815 is allowable. The State will pay allowable costs

claimed that exceed the amount paid, totaling $6,555,895, contingent

upon available appropriations.

For the FY 2008-09 claim, the State made no payment to the county. Our

audit found that $6,335,638 is allowable. The State will pay allowable

costs claimed that exceed the amount paid, totaling $6,335,638,

contingent upon available appropriations.

For the FY 2009-10 claim, the State made no payment to the county. Our

audit found that $36,752,358 is allowable. The State will pay allowable

costs claimed that exceed the amount paid, totaling $36,752,358,

contingent upon available appropriations.

We issued the draft report on March 11, 2014. Wendy Watanabe,

Auditor-Controller, transmitted the Los Angeles County Department of

Mental Health’s response on March 24, 2014. In a letter dated March 21,

2014, Marvin Southard, Director, Los Angeles County Department of

Mental Health, disagreed with the audit results. We issued the final

report on March 28, 2014.

Subsequently, we revised our audit report based on finalized Early and

Periodic, Screening, Diagnosis and Treatment revenues by the California

Department of Mental Health for FY 2009-10. We recalculated offsetting

reimbursements and revised Finding 5. As a result, allowable costs

increased by $195,812, from $54,051,000 to $54,246,812 for the audit

period. On May 19, 2014, we advised Ed Jewik, Program Specialist V,

Auditor-Controller’s Office, of the revisions. This revised final report

includes the county’s March 21, 2014, and March 24, 2014, responses to

our March 11, 2014, draft report. The county did not comment on the

Finding 5 revision.

This report is solely for the information and use of Los Angeles County,

the California Department of Finance, and the SCO; it is not intended to

be and should not be used by anyone other than these specified parties.

This restriction is not intended to limit distribution of this report, which

is a matter of public record.

Original signed by

JEFFREY V. BROWNFIELD, CPA

Chief, Division of Audits

June 13, 2014

Views of

Responsible

Official

Restricted Use


-5-

Revised Schedule 1—

Summary of Program Costs


Cost Elements

Actual Costs

Claimed

Allowable per

Audit

Audit

Adjustment

Reference 1


Direct costs:

Referral and mental health assessments

$ 3,315,277

$ 2,006,513

$ (1,308,764)

Finding 1

Designation of lead case manager

237,973

66,311

(171,662)

Finding 2

Authorize/issue payments to providers

35,886,282

31,124,171

(4,762,111)

Finding 3

Psychotherapy/other mental health services

36,009,630

29,522,003

(6,487,627)

Finding 1,3

Total direct costs

75,449,162

62,718,998

(12,730,164)

Indirect costs

2,865,255

2,336,371

(528,884)

Finding 4

Total direct and indirect costs

78,314,417

65,055,369

(13,259,048)

Less offsetting reimbursements

(64,550,621)

(61,331,368)

3,219,253

Finding 5

Total program costs

$ 13,763,796

3,724,001

$ (10,039,795)

Less amount paid by State2

(13,763,796)

Allowable costs claimed in excess of (less than) amount paid

$(10,039,795)


Direct costs:


$ 3,013,437

$ 2,003,407

$ (1,010,030)

Finding 1


246,062

74,878

(171,184)

Finding 2


40,012,775

32,316,799

(7,695,976)

Finding 3


39,025,529

31,935,254

(7,090,275)

Finding 1,3

Total direct costs

82,297,803

66,330,338

(15,967,465)

Indirect costs

2,473,802

2,068,524

(405,278)

Finding 4


84,771,605

68,398,862

(16,372,743)


(65,077,573)

(60,984,047)

4,093,526

Finding 5

Total program costs

$ 19,694,032

7,414,815

$ (12,279,217)


(858,920)


$ 6,555,895


Direct costs:


$ 2,776,548

$ 2,889,594

$ 113,046

Finding 1


238,688

95,655

(143,033)

Finding 2


38,280,035

38,438,069

158,034

Finding 3


33,373,722

34,235,594

861,872

Finding 1,3

Total direct costs

74,668,993

75,658,912

989,919

Indirect costs

2,501,472

2,540,603

39,131

Finding 4


77,170,465

78,199,515

1,029,050


(70,798,126)

(71,853,877)

(1,055,751)

Finding 5

Total claimed amount

6,372,339

6,345,638

(26,701)

Less late claim penalty3

—

(10,000)

(10,000)

Total program costs

$ 6,372,339

6,335,638

$ (36,701)

Less amount paid by State

—


$ 6,335,638


-6-

Revised Schedule 1 (continued)


Direct costs:


$ 4,873,428

$ 6,100,219

$ 1,226,791

Finding 1


282,403

115,631

(166,772)

Finding 2


42,481,797

41,703,269

(778,528)

Finding 3


32,507,437

33,497,764

990,327

Finding 1,3

Total direct costs

80,145,065

81,416,883

1,271,818

Indirect costs

2,536,725

2,779,097

242,372

Finding 4


82,681,790

84,195,980

1,514,190


(45,264,232)

(47,433,622)

(2,169,390)

Finding 5


37,417,558

36,762,358

(655,200)

Less late claim penalty3

(10,000)

(10,000)

Total program costs

$ 37,417,558

36,752,358

$ (665,200)

Less amount paid by State

—


$ 36,752,358

Summary: July 1, 2006 through June 30, 2010

Direct costs:


$ 13,978,690

$ 12,999,733

$ (978,957)


1,005,126

352,475

(652,651)


156,660,889

143,582,308

(13,078,581)


140,916,318

129,190,615

(11,725,703)

Total direct costs

312,561,023

286,125,131

(26,435,892)

Indirect costs

10,377,254

9,724,595

(652,659)


322,938,277

295,849,726

(27,088,551)


(245,690,552)

(241,602,914)

4,087,638


77,247,725

54,246,812

(23,000,913)

Less late claim penalties3

—

(20,000)

(20,000)

Total program costs

$ 77,247,725

54,226,812

$ (23,020,913)


(14,622,716)


$ 39,604,096

_________________________ 1 See the Revised Findings and Recommendations section. 2 County received categorical payment from the California Department of Mental Health from FY 2009-10 budget. 3

The county filed its FY 2008-09 and FY 2009-10 annual reimbursement claims after the due date specified in

Government Code section 17560. Pursuant to Government Code section 17568, the State assessed a late filing

penalty equal to 10% of allowable costs, not to exceed $10,000, for each late claim filed.


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Revised Findings and Recommendations

The county overstated assessment and treatment costs by $5,749,573 for

the audit period. The costs are claimed in two cost components:

assessment costs in Referral and Mental Health Assessments and mental

health treatment costs in Psychotherapy/Other Mental Health Services.

Consistent with our prior audit report of county-filed claims for the

Handicapped and Disabled Students Program for the period July 1, 2003

through June 30, 2006 (issued June 30, 2010), the county claimed mental

health services costs that are not fully based on actual costs to implement

the mandate program. For FY 2006-07 and FY 2007-08, the county did

not provide support for its claim in a testable format that we could

validate. For FY 2008-09 and FY 2009-10, the county provided unit-of-

service reports that were based on preliminary information. As a result,

these reports did not fully support claimed costs.

We shared our concerns regarding the claims support documentation

with county staff. County staff agreed with our concerns and took steps

to provide support for its claims. For FY 2006-07 and FY 2007-08, we

granted the county’s request for additional time to verify claimed units of

service with its vendors. However, the county did not complete its

verification. For FY 2008-09 and FY 2009-10, we reiterated our

concerns that the units of service may not accurately reflect actual units

of service provided to eligible clients. In light of these issues, the county

created ad hoc system queries and provided the unit-of-service datasets

for the audit period to support claimed costs. The county provided

similar support in the prior audit to identify mandate-related program

costs.

In reviewing these re-run reports, we noted that reported units did not

reconcile to claimed units. Further, we noted other issues in the reports,

including ineligible case management support services, ineligible and

unsupported individual and group rehabilitation services, ineligible

clients, and duplicate and voided transactions. We verified, on a sample

basis, support for reported transactions. Our testing found services

provided to ineligible clients and unsupported services. We also found

incidences where the county used inaccurate unit rates to compute costs.

The ineligible and unsupported case management support costs primarily

consisted of pre- and post-individualized education plan (IEP) case

management support services that are not eligible under the program’s

parameters and guidelines, and/or related state regulations that form the

basis for the state-mandated cost program. The county provided support

for a few incidences of costs related to eligible client case management

that we found allowable.

The Commission on State Mandates (CSM) issued a statement of

decision on May 26, 2011, stating that the portions of rehabilitation

services related to socialization are not reimbursable under the

parameters and guidelines. The statement of decision was issued in

reference to an incorrect reduction claim filed by Santa Clara County for

the Handicapped and Disabled Students (HDS) Program. In light of the

FINDING 1—

Overstated

assessment and

treatment costs


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CSM statement of decision, the county must separate and exclude the

ineligible portions of rehabilitation services. The county did not support

the eligible portion of costs.

We recalculated costs based on actual, supportable units of service

provided to eligible clients using the appropriate unit rates that

represented the actual costs to the county. We excluded the costs related

to ineligible or unsupported transactions.

The following table summarizes the adjustments to assessment and

treatment costs claimed:

FY 2006-07


$ 3,315,277

$ 2,006,513

$ (1,308,764)

Psychotherapy/other mental health services 25,436,573

21,311,115

(4,125,458)

Total

$ 28,751,850

$ 23,317,628

$ (5,434,222)

FY 2007-08


$ 3,013,437

$ 2,003,407

$ (1,010,030)


22,503,910

(2,785,909)

Total

$ 28,303,256

$ 24,507,317

$ (3,795,939)

FY 2008-09


$ 2,776,548

$ 2,889,594

$ 113,046


22,261,754

771,903

Total

$ 24,266,399

$ 25,151,348

$ 884,949

FY 2009-10


$ 4,873,428

$ 6,100,219

$ 1,226,791


19,780,617

1,368,848

Total

$ 23,285,197

$ 25,880,836

$ 2,595,639

Summary


$ 13,978,690

$ 12,999,733

$ (978,957)


85,857,396

(4,770,616)

Total

$ 104,606,702

$ 98,857,129

$ (5,749,573)

The following table summarizes the calculation of allowable costs:

Fiscal Year

2006-07

2007-08

2008-09

2009-10

Total

County re-run costs

$ 27,533,869

$ 28,467,858

$ 25,644,148

$ 26,598,513

$ 108,244,388

Incorrect unit rates

1,665,481

437,256

(442,898)

(701,956)

957,883

Ineligible clients

(3,509,711)

(2,889,713)

(49,498)

(14,547)

(6,463,469)

Ineligible and unsupported

rehabilitation costs

(1,033,579)

(423,444)

—

(904)

(1,457,927)

Ineligible case management support (1,335,849)

(1,081,998)

—

—

(2,417,847)

Duplicate and voided transactions

(1,539)

(395)

(170)

(270)

(2,374)

Unsupported transactions

(1,044)

(2,247)

(234)

—

(3,525)

Total amount allowed

$ 23,317,628

$ 24,507,317

$ 25,151,348

$ 25,880,836

$ 98,857,129


-9-

The program’s parameters and guidelines provide reimbursement for

mental health services when required by the pupil’s IEP. These services

include assessments, collateral, case management, individual and group

psychotherapy, medication monitoring, intensive day treatment, and day

rehabilitation services. The parameters and guidelines further specify that

when providing mental health treatment services, the activities of

socialization and vocational services are not reimbursable.

Title 2, California Code of Regulations (CCR), section 60020,

subdivision (i), which forms the basis for the services in the State-

mandated cost program, does not include case management support for

pre- and post-IEP services. As such, these costs are not included in the

program’s parameters and guidelines. Furthermore, Government Code,

section 7576, subdivision (h), states that the county mental health agency

does not have fiscal or legal responsibility for costs it incurs prior to

approval of an IEP, except for costs associated with conducting a mental

health assessment.

The parameters and guidelines specify that the State will reimburse only

actual increased costs incurred to implement the mandated activities that

are supported by source documents that show the validity of such costs.

Recommendation

No recommendation is applicable for this report, as the consolidated

program no longer is mandated.

County’s Response

We agree with the recommendation, however, we disagree with the

findings.

The County will dispute the disallowances for ineligible and

unsupported mental health services costs and case management support

costs. It is always the County’s intent to claim eligible and supported

costs that are in compliance with the Parameters and Guidelines for this

mandate.

The State Controller's Office (SCO) conducted the audit as if Los

Angeles County Department of Mental Health (DMH) used an actual

cost method for calculating the claims. DMH used the cost report

method for calculating the claims, a method approved under the

Parameters and Guidelines and used by the State Department of Mental

Health to reconcile and pay not only SB90 claims, but Federal

Financial Participation; State EPSDT, and other state funding sources.

As the cost report method relies on the providers’ internal records,

reliance on the “data runs,” which the SCO insisted on having, is an

inaccurate method for identifying costs and thus is an illegitimate

auditing methodology under the parameters and guidelines.


-10-

SCO’s Response

The finding and recommendation remain unchanged.

As noted in the finding for FY 2006-07 and FY 2007-08, the county did

not provide support for costs it claimed in a testable format that we could

validate. The county did not identify the program participants and did not

identify when the participants received the services. During the current

audit, the county ran ad hoc queries to identify mental health services

provided to program participants. The county re-ran the ad hoc queries

for FY 2008-09 and FY 2009-10 because the initial queries provided

were based on preliminary information.

The county’s claims were computed using the cost report method. The

cost report method does not specifically identify the county and vendor

staff performing the mental health services, but instead, utilizes the units

of mental health services provided to program participants and the

applicable unit rates to calculate the costs. In contrast, under the direct

cost method, the county would be required to identify personnel and their

time providing services to program participants. The county did not

provide support for its claims using the direct cost method.

The program’s parameters and guidelines and SCO claiming instructions

state that the county may only claim actual costs to implement the

mandated cost program. The cost report method is an acceptable

methodology for claiming actual costs. We recalculated allowable costs

that the county supported using the cost report method and subtracted

that amount from claimed costs to arrive at the audit adjustments.

The county claimed unsupported administrative staff salaries and

benefits totaling $652,651 for the audit period. These costs are claimed

in the Designation of Lead Case Manager cost component.

The county did not identify the mandate-related activity for claimed staff

salaries and benefits at the county’s Department of Mental Health

(LACDMH) and Department of Children and Family Services (DCFS).

The DCFS did not provide any supporting documentation for claimed

costs. During the audit, the LACDMH prepared and provided duty

statements that listed activities performed for the positions claimed.

However, the duty statements reflected general administrative duties that

are not mandate-related. Further, LACDMH staff did not provide

documentation supporting actual time spent performing the duties listed

in the duty statements. As such, the county did not provide evidence that

supported actual time spent performing reimbursable, mandate-related

activities.

FINDING 2—

Unsupported

administrative costs


-11-

The following table summarizes the unsupported costs:

Fiscal Year

2006-07

2007-08

2008-09

2009-10

Total

Unsupported costs:

LACDMH administrative costs

$ (106,192)

$ (141,243)

$ (143,033)

$ (166,772)

$ (557,240)

DCFS administrative costs

(65,470)

(29,941)

— —

(95,411)

Audit adjustments

$ (171,662)

$ (171,184)

$ (143,033)

$ (166,772)

$ (652,651)




Recommendation



County’s Response


findings.

The County feels that the administrative staff provided the program

administrative activities that supported the claimed cost. DMH claimed

the salaries and employee benefits for those administrative staffs who

were dedicated 100% to the AB 3632 program.

SCO’s Response


The county did not provide documentation supporting the mandate-

related activities performed by staff or the time spent by staff performing

the activities.

The county claimed unallowable residential placement costs totaling

$20,033,668 for the audit period. These costs include both board-and-

care and mental health treatment costs. The board-and-care costs are

included in the Authorize/Issue Payments to Providers cost component,

while the mental health treatment costs are included in the

Psychotherapy/Other Mental Health Services cost component.

The county claimed ineligible vendor payments totaling $19,915,861,

which included board-and-care costs of $12,959,239 and mental health

treatment costs of $6,956,622. The ineligible vendor payments were for

the out-of-state residential placement of seriously emotionally disturbed

pupils in facilities that are owned and operated for profit. Only

placements in facilities that are owned and operated on a nonprofit basis

are eligible for reimbursement.

FINDING 3—

Ineligible vendor costs


-12-

In our testing of payments, we found incidences when the county

computed costs using incorrect rates, incorrect start and end placement

dates, and other minor calculation errors. We recalculated costs using

correct rates and placement dates, and found in an overstatement of costs

totaling $117,807.

A vendor that previously was a for-profit organization received formal

designation as a nonprofit during FY 2008-09. We allowed the costs

from the date that the vendor became a nonprofit.

The following table summarizes the overstated costs:

Fiscal Year

2006-07

2007-08

2008-09

2009-10

Total

Ineligible placements:

Treatment costs

$ (2,362,169)

$ (4,304,366)

$ 89,969

$ (378,521)

$ (6,955,087)

Board-and-care costs

(4,762,111)

(7,695,976)

158,034

(778,528)

(13,078,581)

Audit adjustments

$ (7,124,280)

$ (12,000,342)

$ 248,003

$ (1,157,049)

$ (20,033,668)

The program’s parameters and guidelines specify that the mandate is to

reimburse counties for payments to service vendors providing placement

of seriously emotionally disturbed pupils in out-of-home residential

facilities as specified in Government Code section 7581 and Title 2,

California Code of Regulations (CCR), section 60200.

Title 2, CCR section 60100, subdivision (h), specifies that out-of-state

residential placements shall be made in residential programs that meet

the requirements of Welfare and Institutions Code section 11460,

subdivision (c)(2) through (3). Subdivision (c)(3) states that

reimbursement shall be paid only to a group home organized and

operated on a nonprofit basis.




Recommendation



County’s Response


findings.

In the original test claim decision adopted by the Commission on

May 25, 2000, regarding out of state residential placement, the

Commission found that counties had a positive obligation to provide

mental health services regardless of the location of the student. Further,

even if the regulation is valid, such regulation would apply only to the

board and care payment, not payments for mental health services.


-13-

SCO’s Response


As noted in the finding, the county claimed ineligible vendor payments

for the out-of-state residential placement of seriously emotionally

disturbed pupils in facilities that are owned and operated for profit. Only

placements in facilities that are owned and operated on a nonprofit basis

are eligible for reimbursement. Vendor payments include costs for

board-and-care and related mental health services.

The county overstated indirect costs by $652,659 for the audit period.

The county miscalculated indirect costs for the audit period because it

applied its rates to preliminary, unsupported, and ineligible direct costs.

As a result, the county overstated costs for FY 2006-07 and FY 2007-08,

and understated costs for FY 2008-09 and FY 2009-10.

In all fiscal years, the county used indirect cost rates to recover costs

related to administering mental health service programs at county-run

facilities, in-state vendors, and out-of-state vendors. We found the

allocations to be reasonable and consistent with the allocations in the

county’s cost report submitted to the California Department of Mental

Health (CDMH). However, as described in Findings 1, 2, and 3, the

county claimed direct costs that were not fully based on actual costs to

implement the mandate program.

We applied the county’s indirect cost rates to eligible direct costs of

services provided at county-run facilities, in-state vendors, and out-of-

state vendors.

The following table summarizes the adjustments to indirect costs:

Fiscal Year

2006-07

2007-08

2008-09

2009-10

Total

Direct costs of county-run facilities

$ 9,338,772

$ 8,736,077

$ 8,332,039

$ 9,921,390

Indirect cost rates

12.1336%

11.3438%

13.2962%

12.1653%

Allowable indirect costs

$ 1,133,129

$ 991,003

$ 1,107,844

$ 1,206,967

$ 4,438,943

Direct costs of in-state vendors

$ 14,045,167

$ 15,846,118

$ 16,914,964

$ 16,075,077

Indirect cost rates

6.3137%

5.0856%

5.9607%

6.3274%


$ 886,770

$ 805,870

$ 1,008,250

$ 1,017,134

$ 3,718,024

Direct costs of out-of-state vendors

$ 8,210,888

$ 9,431,344

$ 11,973,840

$ 13,717,147

Indirect cost rates

3.8543%

2.8803%

3.5453%

4.046%


$ 316,472

$ 271,651

$ 424,509

$ 554,996

$ 1,567,628

Total allowable indirect costs

$ 2,336,371

$ 2,068,524

$ 2,540,603

$ 2,779,097

$ 9,724,595

Claimed indirect costs

2,865,255

2,473,802

2,501,472

2,536,725

10,377,254

Audit adjustments

$ (528,884)

$ (405,278)

$ 39,131

$ 242,372

$ (652,659)

FINDING 4—

Overstated indirect

costs


-14-

The parameters and guidelines specify that indirect costs incurred in the

performance of the mandated activities and adequately documented are

reimbursable.

The parameters and guidelines further specify that indirect costs may be

claimed to the extent that they have not already been reimbursed by the

CDMH from categorical funding sources.

Recommendation



County’s Response


findings.

The State auditor’s discovery of ineligible units of service resulted in

the ineligibility of the indirect costs. As the adjustments are based on

Findings 1 through 3, therefore to the extent that those findings are

incorrect, these would need to be adjusted also.

SCO’s Response


The overstated indirect costs do result from unallowable costs identified

in Findings 1 through 3.

The county overstated offsetting reimbursements by $4,087,638 for the

audit period.

The overstatement results from applying the Short Doyle/Medi-Cal

(SD/MC), and Healthy Families, and Early and Periodic Screening,

Diagnosis, and Treatment (EPSDT) funding percentages to ineligible and

unsupported direct and indirect costs, and using preliminary EPSDT

funding percentages to calculate EPSDT reimbursements. The county

also applied the California Department of Social Services (CDSS) 40%

share reimbursement of board-and-care costs to ineligible direct costs.

For FY 2006-07, FY 2007-08, and FY 2009-10, the county also included

prior period adjustments that related to changes in SD/MC and EPSDT

offsets identified after the settlement process. However, as noted in

Finding 1, these adjustments are primarily based on ineligible and

unsupported costs.

The county identified and applied the appropriate funding percentages

for SD/MC and for the Healthy Families programs. For residential

placement costs, the county appropriately applied the CDSS 40% share

of board-and-care costs, and Local Revenue Funds (realignment funds)

FINDING 5—

Overstated offsetting

reimbursements


-15-

used for the county’s 60% share of board-and-care costs. The county

properly identified and reduced its claims by reimbursements received

under the Individuals with Disabilities Education Act (IDEA) and

CDMH categorical funds.

We recalculated allowable offsetting reimbursements for all relevant

funding sources and applied the appropriate rates for SD/MC, Healthy

Families and EPSDT. We did not allow offsetting reimbursements for

ineligible or unsupported costs, and excluded the prior period

adjustments.

The following table summarizes the overstated offsetting

reimbursements:

Amount

Claimed

Amount

Audited

Audit

Adjustment

FY 2006-07

IDEA

$ (13,832,574)

$ (13,832,574)

$ —

CDMH categorical

(16,086,217)

(16,086,217)

—

SD/MC

(7,158,946)

(5,475,068)

1,683,878

EPSDT

(5,610,900)

(4,310,485)

1,300,415

Healthy families

(537,988)

(420,604)

117,384

CDSS (40% share)

(14,380,701)

(12,449,668)

1,931,033

Realignment

(8,717,000)

(8,717,000)

—

Prior period adjustments

1,773,705

(39,752)

(1,813,457)

Total

$ (64,550,621)

$ (61,331,368)

$ 3,219,253

FY 2007-08

IDEA

$ (13,832,574)

$ (13,832,574)

$ —

CDMH categorical

(17,531,923)

(17,531,923)

—

SD/MC

(6,387,741)

(5,670,280)

717,461

EPSDT

(5,127,356)

(4,500,827)

626,529

Healthy families

(546,132)

(473,723)

72,409

CDSS (40% share)

(16,017,086)

(12,926,720)

3,090,366

Realignment

(6,048,000)

(6,048,000)

—


413,239

—

(413,239)

Total

$ (65,077,573)

$ (60,984,047)

$ 4,093,526

FY 2008-09

IDEA

$ (13,832,574)

$ (13,832,574)

$ —

CDMH categorical

(26,614,944)

(26,614,944)

—

SD/MC

(6,759,136)

(7,322,968)

(563,832)

EPSDT

(3,674,348)

(4,105,567)

(431,219)

Healthy families

(502,110)

(499,596)

2,514

CDSS (40% share)

(15,312,014)

(15,375,228)

(63,214)

Realignment

(4,103,000)

(4,103,000)

—

Total

$ (70,798,126)

$ (71,853,877)

$ (1,055,751)


-16-

Amount

Claimed

Amount

Audited

Audit

Adjustment

FY 2009-10

IDEA

$ (13,832,574)

$ (13,832,574)

$ —

CDMH Categorical

(2,437,804)

(2,437,804)

—

SD/MC

(5,447,326)

(6,525,578)

(1,078,252)

EPSDT

(2,702,199)

(3,293,906)

(591,707)

Healthy families

(245,276)

(268,879)

(23,603)

CDSS (40% share)

(16,992,719)

(16,681,308)

311,411

Realignment

(4,393,573)

(4,393,573)

—


787,239

—

(787,239)

Total

$ (45,264,232)

$ (47,433,622)

$ (2,169,390)

Summary

IDEA

$ (55,330,296)

$ (55,330,296)

$ —

CDMH categorical

(62,670,888)

(62,670,888)

—

SD/MC

(25,753,149)

(24,993,894)

759,255

EPSDT

(17,114,803)

(16,210,785)

904,018

Healthy Families

(1,831,506)

(1,662,802)

168,704

CDSS (40% share)

(62,702,520)

(57,432,924)

5,269,596

Realignment

(23,261,573)

(23,261,573)

—


2,974,183

(39,752)

(3,013,935)

Total

$ (245,690,552)

$ (241,602,914)

$ 4,087,638

The program’s parameters and guidelines specify that any direct

payments (categorical funds, SD/MC, EPSDT, IDEA, and other

reimbursements) received from the State that are allocated specifically to

the program, and/or any other reimbursements received as a result of the

mandate, must be deducted from the claim.

Recommendation



County’s Response


findings.

To show diligence, it has been the County’s practice to adjust the

difference between the claimed and State settlement amounts in the

subsequent year claims to reflect the final Medi-Cal and EPSDT

revenues per settlement.

As the adjustments are based on Findings 1 through 3, therefore to the

extent that those findings are incorrect, these would need to be adjusted

also.


-17-

SCO’s Response

Subsequent to the issuance of our final report on March 28, 2014, the

DMH issued its EPSDT settlement for FY 2009-10. We recalculated

offsetting reimbursements and revised Finding 5 to reflect the actual

funding percentage. As a result, offsetting reimbursements decreased by

$195,812, from $241,798,726 to $241,602,914.

The recommendation and remaining adjustment are unchanged.

The remaining adjustment relates primarily to the county applying

funding percentages to ineligible and unsupported costs identified in

Findings 1 through 3 based on ad hoc queries the county ran to support

costs claimed.


Attachment—

County’s Response to

Draft Audit Report

State Controller’s Office

Division of Audits

Post Office Box 942850

Sacramento, CA 94250-5874

http://www.sco.ca.gov

S12-MCC-028

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